Dubai debt shock knocks £14bn off bank shares

Britain is in the front line as fears grow over exposure to the Gulf emirate's financial problems. Sarah Arnott reports on a day that sent global stock markets reeling

Dubai was the poster child of the economic boom: a world of unimaginable luxury, impossibly tall towers, and islands shaped like palm trees. This week it became the epitome of recessionary bust.

Global stock markets were left reeling yesterday after the city-state's spectacularly debt-ridden Dubai World holding company asked for an extra six months to pay the $4bn (£2.4bn) chunk due next month. In London, the stock market dropped by 3 per cent, its worst day since March. The French and German markets fared little better, and America's Dow Jones was only saved by being closed for Thanksgiving. Even sterling wavered, falling to its lowest rate against the euro for a month. But it was Britain's battered banks that were the worst affected. Fears over the extent of their exposure to Dubai's $80bn debt knocked nearly £14bn off their value by the end of the day.

The Gulf emirate's financial problems come as no surprise. It has already been bailed out to the tune of $10bn by fellow United Arab Emirates (UAE) member Abu Dhabi, and it had managed to scrape together another $5bn from two Abu Dhabi banks hours before the request for a "standstill agreement" to give Dubai World time to "restructure" itself. But global financial confidence is only just starting to recover from last year's banking crisis. And it is not yet known how much is at risk, and where.

Part of the problem is the scale. Dubai World's reach is truly vast. Within the main holding company are 10 subsidiaries, each a monster in its own right. The highest profile is the Nakheel property group, which owes the $4bn due next month. Nakheel is behind the Palm project that has become synonymous with Dubai's ballooning property market. The three palm-shaped islands, built in the waters of the Gulf, looked like a developer's triumph. The first island – the self-proclaimed Eighth Wonder of the World – sold its initial 2,000 villas within a month and included David Beckham and Brad Pitt on its star-studded list of buyers. But Nakheel is just one part of the sprawling empire. DP World, another division, is the world's fourth biggest ports operator, which includes the UK's London Gateway and Southampton facilities, and the Tilbury Container company, in its global portfolio. Other divisions span everything from hedge funds to Scotland's Turnberry golf course.

By yesterday lunchtime, Europe's financial markets were awash with rumours about which banks are the most in danger from the Dubai debt and what the implications might be. But while estimates of European institutions' exposure gyrated from $13bn to $40bn, there was widespread agreement that the British are the most exposed. "Everybody is looking at who is affected the most and the UK banks are standing in the front line," Shahin Vallée, BNP Paribas's head of Middle East strategy, said.

Nobody expects Dubai to default on its debt, and there is little immediate danger for the state's holdings abroad. But the shock has real financial repercussions, and even if Abu Dhabi does step in with more funding, Dubai World's reorganisation will cost its creditors money. Beyond that, the bigger danger is the blow to global economic confidence, not least because no one knows the scale of the problem. "There are layers of cloud and uncertainty," Mr Vallée said. "Dubai World is not a company, it is a conglomerate with very limited corporate governance and financial transparency so no one knows what its assets are or what the real debt is." The danger is that the crisis stamps out the signs of life helping lift the world's economies out of recession. "The consequences could be to slow down global capital flows again because banks are reluctant to stretch their balance sheets," Mr Vallée said.

For Dubai itself, the money may prove to be the least of the problem. Until now, the Dubai experiment began in the 1950s by Sheikh Rashid, the father of the current ruler, has been an incredible success story. The revenues from the state's minimal oil revenues were initially used to turn it into a major regional trading hub and before long most of all the goods flowing into the Arabian peninsula were going through Dubai. When Sheikh Mohamed, the present incumbent, decided to take the scheme a step further and turn the city into a financial centre and global tourist destination, Dubai hit the big league. Vast amounts of money were spent on property, infrastructure and tax breaks to turn it into the playground of the rich and famous. Such was its success in luring buyers from around that world that between 2003 and 2007 property prices in some parts of the city quadrupled. There seemed to be no limit to the luxury: the opening night of the Palm Island's Atlantis Hotel cost a whopping $20m and included a set from Kylie Minogue and $1m of fireworks.

But the key to the metamorphosis was image, and all the growth was built on debt. "Brand Dubai is not just sun, sea, sand and luxury, it is that everything is possible, the sky is the limit," Professor Gerd Nonneman, a Middle East expert at Exeter University said. "It was a cycle: the brand brought in buyers, which pushed up prices further."

By the end of last year, with property prices slumping by up to 70 per cent, development stalled, plans for the third Palm Island were scaled back, plans for a tower a mile high were cancelled, and more than 400 projects with a total value topping $300bn were put on ice.

On the ground, the congestion which plagued the city has eased as tens of thousands quit after losing their lucrative jobs. The bars in Dubai's luxury hotels still buzz with weekend revellers, but the teeming crowds which once flocked to popular nightspots such as Left Bank in the sprawling Madinat Jumeirah hotel complex have become noticeable by their absence. The property sector, once the lifeblood of the Dubai expatriate workforce, is now shattered, with thousands laid off. Architects, estate agents and construction staff have vanished after building projects ground to a halt. Dubizzle, a local website similarto eBay, has been flooded with adverts from people selling.

But a charm offensive from Sheikh Mohamed had just about held world opinion together. And even this time, Abu Dhabi will not let Dubai drown. "Though there is rivalry between the two ruling families, is it important for Abu Dhabi that people in the outside world don't get the impression that the UAE is a busted flush," Professor Nonneman said. The balance of power in the UAE must shift as Abu Dhabi extracts what political capital it can from its injections of cash he thinks. And the debacle will tarnish the gilded image that was the bedrock of Dubai's success. "It has taken decades to build up 'Brand Dubai' and this is a spectacular blow."

Additional reporting, Ed Alexander, Dubai

Suggested Topics
News
The cartoon produced by Bruce MacKinnon for the Halifax Chronicle-Herald on Thursday, showing the bronze soldiers of the war memorial in Ottawa welcoming Corporal Cirillo into their midst
news
Voices
Funds raised from the sale of poppies help the members of the armed forces with financial difficulties
voicesLindsey German: The best way of protecting soldiers is to stop sending them into disastrous conflicts
Voices
Nigel Farage has backed DJ Mike Read's new Ukip song
voicesNigel Farage: Where is the Left’s outrage over the sexual abuse of girls in the North of England?
Property
One bedroom terraced house for sale, Richmond Avenue, Islington, London N1. On with Winkworths for £275,000.
property
PROMOTED VIDEO
News
The Edge and his wife, Morleigh Steinberg, at the Academy Awards in 2014
peopleGuitarist faces protests over plan to build mansions in Malibu
News
i100
News
peopleFox presenter gives her less than favourable view of women in politics
News
Mario Balotelli has been accused of 'threateningly' telling a woman to stop photographing his Ferrari
peoplePolice investigate claim Balotelli acted 'threateningly' towards a woman photographing his Ferrari
Life and Style
The Zinger Double Down King, which is a bun-less burger released in Korea
food + drinkKFC unveils breadless meat beast
Arts and Entertainment
A shared vision: Cerys Matthews has been familiarising herself with Dylan Thomas’s material, for a revealing radio programme
arts + entsA singer, her uncle and a special relationship with Dylan Thomas
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

Chief Financial Officer

120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?